The RBI is expected to open a forex-swap window for state-owned oil firms, anticipating a further spike in fuel prices once the US sanctions on Iran come into effect from November 4.
Oil industry sources said there had been some indications of the move as the window had been opened earlier, too, in times of a sharp volatility in the rupee against the dollar.
The spike in crude prices and the depreciation of the rupee against the dollar is likely to inflate the oil import bill by $25 billion to $114 billion this fiscal.
India, which imports over 80 per cent of its oil needs, spent $87.7 billion on importing 220.43 million tonnes (mt) of crude oil in 2017-18. For 2018-19, the imports are estimated at almost 227mt.
“Oil companies may be asked to purchase all their dollar requirements directly from the RBI through a single bank, an arrangement that was used in 2013 as well. They may also be asked to borrow dollars for import payments directly from foreign branches of Indian banks. These funds may be borrowed for the longer term instead of very short-term funds borrowed currently,” Soumya Kanti Ghosh, chief economist of the SBI, said in a research report.
As oil imports do not change with a rise or fall in prices, the move could be another step to tackle a slide in the rupee with oil prices putting pressure on the current account deficit and the currency.
“The oil marketing companies are one of the largest buyers of forex in the Indian rupee market. With persistent one-way flow (selling rupee, buying dollar), the oil marketing companies can add forex volatility to the rupee during a time global risk sentiment and foreign inflows are fragile,” Morgan Stanley in a note said.
Volatility check
With this facility, the Reserve Bank is trying to reduce volatility in the rupee market. Oil marketing companies can now swap the rupee for dollars and after a definite time period return the dollars back to the RBI. This will give time to the oil marketing companies to return dollars while not affecting the country’s reserves.
Even if the oil marketing company is not able to return the dollars in the given time frame, the central bank has the option of rolling over the swap.
“If implemented, it would have only a short-lived positive impact on dollar vs rupee.
“It would represent a step-up in official actions against the rupee’s depreciation, but alone is likely insufficient to address concerns over India’s current account vulnerability, while global conditions remain challenging amid rising oil prices and higher US treasury yields,” Dushyant Padmanabhan of Nomura said in a report.